Opinion

Edward Hadas

The stupidity of student debt

By Edward Hadas
July 2, 2014

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The fast increase in loans to pay for higher education is a trend that is moving in the wrong direction. The idea that borrowing should play an important role in financing higher education, now standard thinking in the United States and the United Kingdom, is financially dangerous and economically wrongheaded.

Overall, American households are deleveraging. Most notably, U.S. mortgage debt outstanding has fallen to 51 percent from 71 percent of GDP since the end of 2008, according to survey data from the New York Federal Reserve. However, over the same period the ratio of student loans to GDP increased to 5.7 percent from 4.3 percent. The $1 trillion now outstanding is economically significant. In England, the ratio of student loans to GDP is only about half as high as in the United States, but the 80 percent increase over the last five years has been even faster.

For the financial system, the growth is simply bad news. The last thing highly leveraged economies need is an expanding category of debt. Worse, student debt makes the financial system less secure and more complicated, thanks to high default rates and complex repayment terms. Also, student debt, like all debt, distorts behaviour. Heavily burdened new graduates are likely to delay such adult activities as buying houses and having children.

Few people would argue with these negative effects. But after decades of increased borrowing to pay for almost everything – housing, cars, holidays, government spending – it seems natural to use the credit system to put off paying for just one more desirable thing until some fine day when more money is available.

Defenders of education loans sometimes claim that the investment brings returns, for example the higher incomes which a degree will usually produce, only over time and so deferring payments makes economic sense. For student loans, however, the argument is confused.

The way to look at education financing is from the perspective of the whole society, not the cashflow of individual borrowers. Socially, most of each year’s crop of new graduates is needed to keep the economy running at a steady pace. Their education is a consistent operating expense of the economy. It follows that it should be paid for out of the current national income.

Borrowing is more defensible for what might be called incremental students, the graduates who will improve, not merely maintain, the economy. Even if the case for debt financing is better for this group, though, it seems silly to focus too much on a relatively small cohort. In any case, it is not the students who should do the borrowing. The gains they produce will be shared throughout the economy. The debt taken on their behalf should be socialised – borrowed by their universities or by the government.

Of course, if education is to be funded without individual borrowing, the cash has to be found somewhere else. That sounds daunting, but developed economies all manage to provide elementary and secondary education without much cost to parents. They could easily do the same for universities.

The first step is to throw off the illusion of debt-think. Debt cannot magic away the hard reality of spending. Borrowed money may be repaid in the future, but it is spent in the present. Higher education, or anything paid for through debt, makes use of today’s resources. The key decision is not how education will be financed, but how many resources will be dedicated to it.

That may mean a reduction in the resources dedicated to higher education. However, tuition payments could not cover even the leanest imaginable system. Self-financing may have been possible a half century ago, but now the so-called Baumol Effect precludes that easy solution. Economist William Baumol pointed out in the 1960s that the increase in real wages which accompanies a rise in overall labour productivity makes labour-intensive activities like advanced education increasingly expensive.

However, the same increase in productivity also frees up more resources. The trick is for society to find a way to pay. Charity can help. American universities in particular already rely extensively on donations. However, when voluntary funds fall short, it is fair to make the socialisation of expenses compulsory – with taxes.

Today’s government-designed student loans with income-dependent repayment rates already look like an ungainly form of tax, and certainly feel like a tax to borrowers. Of course, a conversion from a system of tax-like loans to an arrangement of grants and taxes would be politically unpopular. Many American voters want to shrink the government, not add something like $200 billion to its expenditure.

The prejudice against state payment was socially acceptable when people were poorer and fewer of them went to college. Now though, higher education has become a public good. No amount of debt-think can take away the public’s responsibility for paying for it.

Comments
40 comments so far | RSS Comments RSS

Higher education is very necessary, however higher education institutions are big business. They are as driven to deriving higher and higher income as much as large corporations. The content of this article should be obvious to everyone. People need to push back on higher education.

Posted by Wisdomismygoal | Report as abusive
 

Or simply have a responsible parent that starts a college fund the moment they get pregnant. The truly poor would still have grants/scholarships available to them. Also, the writer seems too forget that it is not just the additional national debt burden or ever increasing the size of government that make this proposal DOA…..the biggest problem with enacting a plan like this are the MILLIONS of folks who played the game, not gone on that world vacation or gotten the latest model car, and paid off their student loans. They won’t be too happy to hear it’s now free for their neighbor. If and when this latest entitlement gets proposed by President Obama (and I’m sure he feels he can do it with a wave of a pen, God help us if its not just tax deduction versus creating a new massive, bloated, dysfunctional federal bureaucracy like Obamacare. The value of a college education is overblown anyway. Instead of facing that their cost/income vs. student’s return models no longer work, universities have chosen the route of EZ loans to place huge burdens on the newest unsuspecting students. Much like a Casino offering $100 in Free Slot Play, the average intelligent college student would be more successful putting those college loan funds towards starting a business.

Posted by ohiofair | Report as abusive
 

Agreed…. more taxes should be levied to subsidize the cost of education at our pubic institutions – to avoid student debt.

b. Universities need to find out how to dial back the cost of a college credit hour to levels back in 1980 adjusted for inflation. I don’t know how they screwed it up but they did. My first guess is the over paid over staffed administrative positions.

Did you know Pen State pays their president 2.9 million a year!!! And the guy fired for the Sandusky scandal was paid $2.9 million for leaving!!!

Do I hear a case for maximum wage? How about a multiple of the minimum wage?

Posted by michaelryan | Report as abusive
 

“Most notably, U.S. mortgage debt outstanding has fallen to 51 percent from 71 percent of GDP since the end of 2008, …”
I wonder, is that because fewer people are buying houses or is that mostly from the fraudulent mortgage loans that collapsed to value=zero and dragged the whole economy into a depression….?

the family across the street bought the house, then took out a 2nd, and a 3rd mortgage based on ‘rising values’ – the 2nd mortgage was used to pay the 1st mortgage, then the 3rd used to pay the 2nd & 1st mortgage – and you can see how this ends…. eventually the money ran out; foreclosure; short sale for about 50% of the house original purchase price; my neighborhood “comps” go in the toilet; and eventually the whole world ‘goes under water’

however the mortgage originators got their fees, all the other hanger-ons to real estate transactions got their fees – all free, clear and up front – and left the mess for the rest of us.

as for ‘we should be able to provide free college education to everyone’ – you need to go see how that system works.

students get standard tests, students are selected by some (government) panel. they are almost always told which university they may attend and when.

every student in the ‘free advanced education’ system is _not_ selected, or allowed, to attend university.

the selection panels/process knows exactly how many students may attend university next year and that’s how many are selected. no more – regardless of test scores, qualifications, etc and etc.

having lived, schooled and worked in Europe – and with more than passing idea of how this all works out, I’m unable to count the number of ‘foreign students’ enrolled (by wealthy parents) I’ve seen at USA colleges / universities simply because – badda bing badda boom, their kid was not selected by the government for a free advanced education.

what the USA offers is the opposite. anyone with little/some/excellent qualifications can go to college and get an degree in about any field they want as long as they can pay for it.

now with Federally guaranteed student loans, there is absolutely no reason for any higher education institution to even _think_ about “cost containment” – the government will pony up $5,000 or $50,000 a semester, no questions asked.

whether it ever gets paid back….?
yeah, that’s a question.

it’s the same basic scenario / scam as the mortgage fraud – “No money down, no income needed, no documentation, no questions, sign here – all guaranteed by the US Government”

Posted by Breadie | Report as abusive
 

“manage to provide elementary and secondary education without much cost to parents.” School taxes in the US are definitely a lot of cost. As a single family home owner, I pay a huge tax that I curse every year as it rises by 5-14% and my salary does not. If they added the costs of college onto that it would be impossible to pay and completely unfair.
I do though agree with Senator Warren that if the government can loan money to big banks and businesses at near 0%, why can’t it lend to our students at 2%? That should easily pay the cost of the service.

Posted by tmc | Report as abusive
 

The American conservative value system demands someone make a profit for absolutely everything. They feel if there is no profit there is no public or private need for the “service.” It is a simple case of follow the money to develop policy, which is different from personal corruption.

Hence, education may well head in the Australian direction where their current far right wing government (and their previous centrist governments) continually push more and more money to private schools regardless of how wealthy, and neglect state ones. Anyone for $20,000 a year for high school?

Posted by ArghONaught | Report as abusive
 

So, @ArghONaught, you’re saying we Americans are like the Ferengi?

Posted by tmc | Report as abusive
 

@tmc, I had not thought about it, but…

Posted by ArghONaught | Report as abusive
 

The University should have to be the co-signer since they are just passing their own construction and operation deficits on to new students each year. Tuition and fees go up, but few notice because it’s all part of the ‘financial aid’ package. And even if you DO notice, what are you going to do about it as a student? Try and negotiate a better tuition price? Yeah that will go far.

Make the universities the co-signers. They should be invested in their own good students and job placement outcomes. Defaults should go back partially on them too.

Posted by AlkalineState | Report as abusive
 

The most significant reform that could easily be implemented would be to have the college receiving the tuition guarantee the student loan.

Such a reform would introduce some much needed accountability in the education industry.

Posted by BobWhite2000 | Report as abusive
 

While I agree with the author in general, I must take issue with the author’s opinion as to where the solution may lie. The idea of “socializing” student debt only deals with the effect rather than the cause of the problem.
The problem is that the lenders have successfully engineered the laws and regulations of the student lending system in their favor. They get to sell loans to students on take-it-or-leave-it terms that include high interest rates and agressive capitalization. They also get the loans guaranteed by the government. They also made sure that student loans are non-dischargeable in bankrutpcy. In other words they have transferred ALL of the risk of the loan back on to the borrower. What a cherry deal for them!
If, on the other hand, student loans were dischargeable in bankrutpcy, then those students whose loans did not result in the promised middle to high income earnings, would have some recourse to place some of the risk back on to the banks where it should be. This, in turn, would cause banks to pay more attention to what students were really getting for the cost of their education and put pressure on schools to minimize costs and put more emphasis on ensuring that its students were receiving sufficient economic benefit per dollar spent on education.
The education institutions are part of the problem as well. They seem to be turning out degrees like Henry Ford and yet some how the real costs of tuition and expenses are going up rather than down. Universities and grad schools promise the world, but, for most students, fail to deliver the goods. Schools need to be held responsible for the economic viability of their curriculums as well as the outcome for individual students. Otherwise, what are we paying for? I am still hoping that some day some savvy law grads will successfully litigate this issue against their schools and lenders.

Posted by K-Wulf | Report as abusive
 

To be all can be you need education so there is equality without abundant free education. But feeding money to schools or students without requiring that the schools of student accept the money as all fees, has and will result in the school taking the money for pet projects of those run it and high salaries. Also it students are not tested to see if the school is indeed turning out what they expected to only slick operators gain. It is cheaper not to teach than teach.

Posted by SamuelReich | Report as abusive
 

A major problem with student loan debt comes from the for-profit schools. Enormous debt is amassed for “degrees” that have little, if any value. In some cases, more students go into default on their loans than graduate.

There are seven programs where the number of defaulters exceeded the number of completers by more than 1,000. All seven are at the University of Phoenix (ticas.org).

Posted by Poltie430 | Report as abusive
 

I have no fear of taxes, so long as they are levied to address real social problems, and not to line someone’s pocket, or encourage a war. I would pay taxes to ensure a free higher education system for others, despite the fact that I do not have children who will make use of such a system.

Posted by CanyonLiveOak | Report as abusive
 

We could have paid off everyone’s student loans and gave everyone a free ride for the next couple years if we used the money we spent on Iraq to fund education instead…

Posted by anarcurt | Report as abusive
 

No where does the author get down to how and where educational dollars are spent. The benefits for spending on STEM education for the best and brightest, or even for the good and reasonably bright, has a far greater positive impact on the economy than spending for other degrees. The U.S. economy has been dominant in the world because of technology – we are losing that advantage at a scary pace. There is no excuse for not having STEM majors, having achieved a certain level of progress, not being given full scholarships.

Posted by QuietThinker | Report as abusive
 

@QuietThinker… So we should all just drone on? It seems wrongheaded that we would fail to overlook some of history’s greatest achievements through such a narrow focus of what you consider valuable to society. I do not disagree that those skills are extremely valuable, but dismissing all the other perspectives and reduces us to an ant colony of structure and defined purpose. Perhaps a better approach to the severe problem would be several years of community service/ internship/apprenticeship after schooling reflecting the skills obtained. This way the right can’t scream welfare and the left has responsibility for the cost.

Posted by djt04. | Report as abusive
 

Posted by michaelryan: Agreed…. more taxes should be levied to subsidize the cost of education at our pubic institutions – to avoid student debt.”

———

Yeah, because our lower grade public schools are so great… Let’s copy that model. I would really love to fund millions of college kids sitting around getting drunk and high. College has become a joke. It’s a meaningless piece of paper. Some of the dumbest people I ever met went to good colleges.

Posted by dd606 | Report as abusive
 

@djt04 I do not mean to diminish the importance of all the other areas of study, but I don’t think that taxpayers can or should pay for everybody who wants to go to college. I am suggesting how we can avoid excessive public expense that while getting the greatest bang for the public dollar. We do need more STEM majors. It is much harder, or indeed impossible, to decide amongst various other majors as to where to put public dollars and achieve good economic returns on investment for those public dollars.

@dd606 Your characterization is correct with respect to far too many, but not all, college students. STEM majors making good progress at good schools are not the students spending 6 years partying to get a joke degree.

Posted by QuietThinker | Report as abusive
 

I could support this thesis with two caveats. First, high education administrative costs must be reigned in significantly. There simply is no administrator worth more than their research and teaching faculty. Second, the relationship between collegiate sports and higher education deserves reconsideration, especially the idea that “scholarships” are bestowed on barely literate athletes who are not held to high academic standards.

Investments in public education benefit us all – citizens, corporations, and governments alike. It’s much preferably to wasting public money on needless “wars”, foreign aid, and other large scale expenses with questionable at best returns.

Posted by jzachary | Report as abusive
 

I am glad to see student debt getting some mainstream attention. I am saddled with it and knowing that stastistically it is now a systemic issue will hopefully make Congress act.

But one major point that you missed, Mr. Hadas, is that the government guarantees the value of loans to a large swathe of students, thereby negating the need for collateral. Without consequences attached to easy loans, young borrowers have no need to learn what debt really is!

Furthermore, universities can smell this easy money a mile away and consequently hike up tuitions, full well knowing that the costs are paid for by the government anyway – but it’s the individual and not society that shoulders that debt burden. We have, it seems, returned to the days of debt slavery. Right now I’m looking at 15+ years of it. No house or babies, either.

Frankly, my generation is worried but secretly hoping for some sort of debt forgiveness. We feel betrayed by the American dream, by our government, by our parents. The less society does about this issue the more we are proven right.

Posted by peterepeat | Report as abusive
 

We wouldn’t want to spend 200 billion USD per year on something useful like higher education, but our government was so desperate to spend 50 billion USD per month for a 10 year war in Iraq that the Neocons eagerly fabricated a reason to initiate the war.

That war was completely unnecessary. The destabilization of that portion of the Middle East is the war’s only lasting legacy.

We just have to examine our national priorities, a more intelligent populace that is less financially burdened vs. an obscenely profitable military industrial complex.

Hell! Halliburton moved to the Middle East so they don’t even have to pay US taxes. Why doesn’t anyone seem to give a damn about that? I just don’t get it.

Posted by breezinthru | Report as abusive
 

If you speaking against the article, I would guess that you are not a bank.
The banks have the sweetest of deals on student loans, thanks to government skullduggery. Guaranteed repay by student and family. And no bankruptcy allowed.

Banks have PERKS. And money to BUY lobbyists, who BUY politicians.

Posted by Woodstock2 | Report as abusive
 

@Woodstock2
Politicians can’t be bought. Staying bought requires at least a small degree of integrity (albeit perverted). The best you can do with the average politician is a long term lease.

Posted by JRTerrance | Report as abusive
 

Broad generalizations are usually wrong and this author is especially incorrect because not all student debt is the same. Student debt, like any other investment, is a good investment is there is a positive rate of return. Most college graduates from government owned or private not for profits colleges do have a positive rate of return on their investments. There are two categories of students who do not do well. The first is students who do not finish. They have all the disadvantages of debt and few of the advantages. Second, students who attend for profit schools often receive worthless degrees (if they finish at all). The focus should be on these students.

Posted by Ashdodi | Report as abusive
 

Look at college costs over the past twenty years. They have locked onto the rising government funding, provided through Pell grants, low-interest student loans, etc., and the scenario of rising funding absorbed by rising costs is creating a whole new class of indentured servant in America: The college student strapped with huge debt carrying a new class of rent-seeker on their backs…the American college system.

Posted by LOTOGO | Report as abusive
 

Good points, colleges today are costing way over what these degrees are worth. If the smoke and mirrors are taken away, very few degrees are worth the cost. I would bet my bottom dollar that the “average starting salaries” most colleges are saying for students on various degree programs are fabricated. If the government really looked into these numbers, they would most likely have to stop such false advertising, at a cost of lost student population in some programs.
The days of going to college to get a better job is over folks. Sure it can happen but you can also win the lottery. I’m a fan of higher education, but unless daddy can get me into Harvard or Yale, community, trade, or state schools in the right degree program is the only way to go. The university society lives in their own world, with little regard for the real world and what it takes to Make a living in it. These profs need to be taken down a notch or two in salary to give the kids and parents a break.

Posted by cheeze | Report as abusive
 

“The gains they produce will be shared throughout the economy. The debt taken on their behalf should be socialised – borrowed by their universities or by the government.” That explains everything and Mao would agree.

Posted by calexandre | Report as abusive
 

If we bailout banks billions of dollars, we can do the same for our college graduates.

If we can provide free grade school education, we can do the same for college grads.

Universities and colleges have billions of dollars of endowments, TV ad royalties and merchandise profits from college sports, and income from intellectual property rights and business partnerships with various industries while working with grad students and professors. Why not use these revenues to finance or pay for their graduates’ college loans. Instead, universities and colleges invest such revenues in capital markets.

Posted by Glazer | Report as abusive
 

Socialist drivel, characteristically without an ounce of common sense. Reuters, why do you even bother to publish crap like this?

Posted by JRTerrance | Report as abusive
 

@cheeze
“These profs need to be taken down a notch or two in salary”
Really? College profs are paid very little considering their education and qualifications. I TRIPLED my salary immediately and got better benefits when I left my university faculty position for industry. My wife’s graduate advisor had an endowed chair at a major university. She went straight into industry and her starting salary was larger than that of her advisor.

Posted by QuietThinker | Report as abusive
 

A trillion dollars is the Wrath of God. As structured, this debt will never be paid (save by the taxpayer, at some point). A possible solution would be to set-up a process, similar to the Social Security system, in that the Government would pay an individual student’s costs of tuition, living expenses, etc. and then tax that individual student 3-5% of his or her follow-on income, managed by the IRS, until the debt is paid…at no interest This would allow anybody, of any means, a chance to become educated. The enormous numbers enrolled in this program would give the government leverage in maintaining costs, through institutions accepting mandated tuition fees to participate in the system.

Posted by elysianfield | Report as abusive
 

@JRTerrance, capitalism and open markets don’t work for everything. Infrastructure, Healthcare, and Education and of course Government should NOT be controlled by capitalist. Increasingly Energy is seen as part of the infrastructure too. To allow all things to handled by the markets would be initially a serfdom then eventually anarchy.

Posted by tmc | Report as abusive
 

It is still amazing how people can be manipulated by any government. Wall Street sucks 60 trillion out of the economy and no one goes to jail. People have been out of jobs for 5+ years. All of the sudden, the Dow hits a new artificial high and Jobs Reports report a “rosy” outlook. Higher Education is pushed on unsuspecting people at a tremendous debt cost to students. Doctors push poison to their patients. Car manufacturers recall 12 million vehicles. The Wars rage on. Banks dump their mortgages to new Mortgage Holder companies – which in turn have been repossessing homes at a tremendous rate, yet they are immune to federal laws. These new Mortgage Companies are a modern Mafia. Sometimes the government sues the banks for a dozen billion – when they made trillions – and keep the money. The consumer does not see a penny of these lawsuits. If you are well off, these things are foreign to you. Congress is busy stealing. The Secret Service is busy with whores. Cities are busy collecting money from Red Light Cameras. Millions have suffered enough. Is there a wonder that Revolutions happen around the world? – Just what events triggers these? – Good Luck to the elite….

Posted by 4world2c | Report as abusive
 

“Now though, higher education has become a public good”…they’ve become glorified vocational schools for the unemployed that support professional football and basketball teams.

Posted by freekick | Report as abusive
 

“Higher education, or anything paid for through debt, makes use of today’s resources.”
Wrong, it makes use of future resources committed to the present expense. Financing is through the printing of money by the Federal Reserve which is then lent to the banks at low interest. The students’ future labors are the resource required to pay the note.
“The key decision is not how education will be financed, but how many resources will be dedicated to it.”
Wrong again. Student loans are the ONLY LOANS I know of where credit risk is not considered. WHY? I was a student who took out loans, repaid them, and now I pay the loans of defaulting students through higher taxes SO THE BANKS CAN REMAIN WHOLE on money they borrowed from the Fed at almost no interest. The key question really is are we going to continue to hand out taxpayers’ money to any body with no accountability. The authors’ argument utterly fails. It is based on fiction and offers no real solutions. Think for heavens’ sake.

Posted by Zeronine | Report as abusive
 

Australia’s solution to higher education funding is worth a look. It funds about 2/3 of the average cost of a university degree; the rest is paid by the student. The cost of this can be deferred, and then collected through the tax system of a first percentage of income. The former student is only levied once the income reaches a certain level. “Interest,” which equals the current inflation rate, is charged by the government. When this scheme was introduced it was called the Higher Education Contribution Scheme (HECS) – it is now called HELP (why?).
Australia having introduced a world-leading scheme in 1989, the current right-wing government wants to wind it back, increase the interest rate, and probably eventually privatize the debt. Based on this article, I don’t think Edward Hadas would agree with these changes. Why ruin a good system, that is fair to all? Students, who benefit from the scheme in terms of higher income, make a contribution to running the scheme; society benefits by making tertiary education more widely available thus making the country more successful; scholarships no longer dictate access to education.

Posted by GrahamLovell | Report as abusive
 

It’s a ‘Student Loan Bubble’ generated by cheap government funding, and it’s allowed universities to increase education costs faster than any other category and on par with medical costs. It’s not the students’ fault, it’s the commercialization of higher education fueled by cheap lending.

Posted by PapaDisco | Report as abusive
 

I love how the article builds up a valid issue–that US higher education is outrageously expensive–but then launches into the standard statist tax-and-spend screed, deftly sidestepping the rather inconvenient reality that a tax is functionally equivalent to a loan–either way the end user is being charged per unit of time and the debtholder is taking his cut.

The actual issue is that colleges–no, make that education in general–has gotten fat and lazy off no-questions-asked funding through taxes, loans, and private contributions. It’s For Da Chillun after all, and anything that’s For Da Chillun is sacrosanct! I went to one of the top engineering schools in the known universe, and paid well over $100k for my troubles–a choice which will haunt me for much of my adult life. Very few of the folks leading my classes were “professors” of the titled, tenured, high-paid type. Those were off in the ivory tower doing research or “social teaching” for whatever was politically expedient at the time, much of it not related to engineering at all (i.e. lib-arts derp for pampered Chicagoland scions). Instead I got semi-pro TAs and “instructors” who got crap wages to keep the machine rolling–the Morlocks of academia. They did an awesome job, but why must I pay so much money that gets siphoned off by others? I’m getting screwed, and they’re getting screwed, so who exactly is the winner here? Herein lies all of the problems of the American education system.

Posted by CppThis | Report as abusive
 

I agree with the fact that there is a debt problem regarding higher education, but not with the recommendation to subsidize it. I took my student loans out, not my neighbor. I took them out so that I could increase MY earnings, not his. That means I am responsible for the repayment of my loans. It would be immoral to require people who did not benefit from the education to pay for it. I know about the argument that because “society” benefits from higher education “society” should pay for it, but what of personal accountability? We go to college to provide for ourselves, therefore the initial investment and all its risks are ours.

Posted by Bastiattheman | Report as abusive
 

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